Australian Dollar remains weak near 0.7000 on Middle East peace doubts
- AUD/USD softens to around 0.7005 in Monday’s early European session.
- Uncertainty clouded the US-Iran peace deal following threats from Trump.
- RBA hawkish pause could underpin the Aussie.
The AUD/USD pair loses traction to near 0.7005 during the early European trading hours on Monday, pressured by risk-off sentiment. Traders continue to assess the developments surrounding the US-Iran peace deal following fresh threats from US President Donald Trump.
The US-Iran peace talks took place on Sunday in Bürgenstock, Switzerland, with delegations from Iran, the US, Qatar, and Pakistan participating. On Monday, Qatar and Pakistan issued a joint statement on the conclusion of negotiations, saying that talks were conducted in a positive, constructive atmosphere.
Earlier on Monday, the Tasnim news agency cited an Iranian Foreign Ministry spokesman as saying that “a formal transit mechanism was successfully arranged to guarantee the safe passage of commercial vessels through the vital Strait of Hormuz waterway.”
However, markets remain cautious since Trump over the weekend threatened strikes on Iran if Hezbollah keeps attacking Israel. Uncertainty surrounding the US-Iran peace agreement could weigh on the riskier asset, such as the Australian Dollar (AUD) against the US Dollar (USD).
On the other hand, a hawkish interest rate hold from the Reserve Bank of Australia (RBA) might help limit the Aussie’s losses. The RBA decided to leave the Official Cash Rate (OCR) unchanged at 4.35% after its June monetary policy meeting last week. This is a pause following three consecutive 25 basis points (bps) rate hikes earlier this year.
Despite leaving the interest rate unchanged, the board members signaled that further rate hikes might be necessary to achieve its goals.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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